ACCA DipIFR question papers and answers on IAS 41 June 2014

ACCA DipIFR question papers and answers on IAS 41 from June 2014

All questions on IAS 41 Agriculture which have appeared in ACCA DipIFR from June 2014 have been indexed here. The answers are based on the standards prevalent at the exam point in time.

For the benefit of the readers, we have put the following sequentially to help them understand better

  • Question - Relevant portion of the exam pertaining to the standard has been recreated
  • Answer - Answers as shared by the ACCA Examination team which was required for the question
  • Examiners Feedback - Feedback on answers given by the students for that exam, this is a critical part of learning as students can learn from mistakes which other students did

Question :

You are the financial controller of Omega, a listed company which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). Your managing director, who is not an
accountant, has recently attended a seminar and has the following questions for you concerning issues raised at the seminar:

One of the delegates at the seminar was a director of an entity which operates a number of different farms. She informed me that there was a financial reporting standard which applied to farming entities. I think she said it was IAS 41. I’d like to know why a special standard is needed for farming entities. Given that we have IAS 41, does this mean that other IFRSs do not apply to farming entities? Please explain the main recognition and measurement requirements of IAS 41 – I’m not interested in details about disclosures. I am interested, though,
in any areas where the provisions of IAS 41 differ from general IFRSs. I believe I heard that farming entities treat grants from the government in a different way than other entities do. I’m particularly interested to hear about this, assuming I’m correct.

ACCA Answer: 

It is not true that, given the existence of IAS 41 – Agriculture – other IFRSs do not apply to farming companies. The general presentation requirements of IAS 1 – Presentation of Financial Statements, together with the specific recognition and measurement requirements of other IFRSs, apply to farming
companies just as much as others.


IAS 41 deals with agricultural activity. Two key definitions given in IAS 41 are biological assets and agricultural produce. A biological asset is a living animal or plant. Examples of biological assets would be sheep and fruit trees.  The criteria for the recognition of biological assets are basically consistent with other IFRSs, and are based around the Framework definition of an asset.


A key issue dealt with in IAS 41 is that of measurement of biological assets. Given their nature (e.g. lambs born to sheep which are existing assets, the use of cost as a measurement basis is impracticable.  The IAS 41 requirement for biological assets is to measure them at fair value less costs to sell. Changes in fair value less costs to sell from one period to another are recognised in profit or loss. 
Agricultural produce is the harvested produce of a biological asset. Examples would be wool (from sheep) or fruit (from fruit trees). 


The issue of measuring ‘cost’ of such assets is similar to that for biological assets. IAS 41 therefore requires that ‘cost’ should be fair value less costs to sell at the point of harvesting. This figure is then the deemed ‘cost’ for the purposes of IAS 2 – Inventories. 
A consequence of the above treatment is that government grants receivable in respect of biological assets are not treated in the way prescribed by IAS 20 – Government Grants. Where such a grant is unconditional, it should be recognised in profit or loss when it becomes receivable. If conditions attach to the grant, it should be recognised in profit or loss only when the conditions have been met. 


The IAS 20 treatment of grants is to recognise them in profit or loss as the expenditure to which they relate is recognised. This means that recognition of grants relating to property, plant and equipment takes place over the life of the asset rather than when the relevant conditions are satisfied.

ACCA Examiners feedback on answers given by students

This question was not answered well by the majority of candidates attempting it and indeed a reasonable number of candidates did not attempt it at all. As has already been noted in this report, this may be indicative of the fact that these subjects have been regarded as ‘fringe’ topics and not studied diligently by many candidates. It is very important for candidates to ensure that they have studied the whole of the syllabus.


Part (a) required candidates to explain the applicability of general international financial reporting standards (IFRS) to farming entities and also to outline the main recognition and measurement issues outlined in IAS 41. Candidates were specifically asked about the way government grants relating to agricultural activity need to be accounted for. A number of candidates incorrectly stated that other
IFRS do not apply to farming entities. The majority of candidates incorrectly stated that government grants for agricultural activity are accounted for in the same way as other government grants. Most candidates did have some awareness of the concept of a biological asset, and the difficulty of applying
the cost concept to the measurement of such an asset. However the general level of knowledge displayed in this part was rather disappointing.

Question

You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The managing director, who is not an accountant, has recently attended a business seminar at which financial reporting issues were discussed. Following the seminar, she reviewed the financial statements of Omega for the year ended 31 March 2016. Based on this review she has prepared a series of queries relating to those statements: 

‘Another issue discussed at the seminar was financial reporting by farming entities. The issue of ‘biological assets’ was mentioned. I don’t really understand what these are or how they’re recognised and measured in the financial statements. Please explain this to me.’

Answer

A biological asset is defined in IAS 41 – Agriculture – as a living plant or animal. The majority of non-biological assets of an entity have an initial acquisition cost which can be computed with sufficient reliability to be used as its initial carrying value. For biological assets (e.g. a new born calf) this is often not the case. 

For the vast majority of biological assets their initial measurement should be at its fair value less costs to sell. Gains or losses arising from such initial measurement should be recognised in profit or loss. As the biological asset transforms and its fair value less costs to sell changes, the carrying amount of the asset should be updated with changes being recognised in profit or loss.

Examiners Feedback

This question was very popular and generally quite well answered.
Most candidates know that the initial measurement of biological assets should be at its fair value less costs to sell and that further gains or losses should be recognized in profit or loss. Some candidates wrote much about biological transformation and changes in fair value but forgot to mention that those changes less costs to sell are to be recognized in profit or loss. Only a few candidates mentioned that it was necessary to disclose changes in fair value related to
the qualitative changes and to changes in market prices.

Question:

You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The managing director, who is not an
accountant, has recently attended a business seminar at which financial reporting issues were discussed. Following the seminar, she reviewed the financial statements of Omega for the year ended 31 March 2016. Based on this review
she has prepared a series of queries relating to those statements:

Query
‘Another issue discussed at the seminar was financial reporting by farming entities. The issue of ‘biological assets’ was mentioned. I don’t really understand what these are or how they’re recognised and measured in the financial
statements. Please explain this to me.’

ACCA Answer: 

A biological asset is defined in IAS 41 – Agriculture – as a living plant or animal. 1
The majority of non-biological assets of an entity have an initial acquisition cost which can be computed with sufficient reliability to be used as its initial carrying value. For biological assets (e.g. a new born calf) this is often not the case.


(Note: Exact words NOT needed here, just the sense of the point.)


For the vast majority of biological assets their initial measurement should be at its fair value less costs to sell. Gains or losses arising from such initial measurement should be recognised in profit or loss.  As the biological asset transforms and its fair value less costs to sell changes, the carrying amount of the asset should be updated with changes being recognised in profit or loss.

ACCA Examiners feedback on answers given by students

Query two for 5 marks required to briefly explain how biological assets are recognized and measured in the financial statements. This question was very popular and generally quite well answered. Most candidates know that the initial measurement of biological assets should be at its fair value less costs to sell and that further gains or losses should be recognized in profit or loss.


Some candidates wrote much about biological transformation and changes in fair value but forgot to mention that those changes less costs to sell are to be recognized in profit or loss. Only a few candidates mentioned that it was necessary to disclose changes in fair value related to the qualitative changes and to changes in market prices.

Question :

You are the financial controller of Epsilon, a listed entity. The financial statements of Epsilon for the year ended 31 March 20X7 are currently being prepared. Your managing director has sent you three questions regarding the financial statements. 

I’ve recently been reviewing the financial statements of one of our subsidiaries. This subsidiary specialises in both dairy farming and beef farming. There are amounts included in both non-current and current assets:
– The non-current assets include farm machinery which has been purchased. I understand why this machinery has been included as we have spent money on it. However, the non-current assets figure also includes a figure for the
dairy and beef herds. These existing herds were not purchased but are made up of animals the farming subsidiary has bred.
– The inventories include amounts for milk and beef. The milk comes from the dairy herd and the beef comes from the animals we have slaughtered.
– Is there an international financial reporting standard which deals with these issues and how does it require the subsidiary to value and account for the herds and the inventories?

 

Answer:

There is an international financial reporting standard which is particularly applicable to entities such as farming companies. The standard is IAS 41 – Agriculture. 


IAS 41 would regard a dairy or beef herd as an example of a biological asset. A biological asset is a living plant or animal. 


Given the impracticability of measuring the cost of biological assets, IAS 41 requires that they should be measured at each reporting date at their fair value less costs to sell, provided that fair value can be measured reliably. Gains and losses are reported in profit or loss. 


Dairy and beef cows are regularly bought and sold and therefore there should be no problem in determining their fair value which will be equivalent to market value. This would allow the calculation of the carrying amount of the dairy and beef herd in the non-current assets of the subsidiary. 


IAS 41 would regard milk and beef as agricultural produce. Agricultural produce is ‘harvested’ from the biological asset. In the case of the dairy herd, the ‘harvesting’ is the milking of the cows and in the case of the beef herd, the ‘harvesting’ is the slaughtering of the beef cows. 


IAS 41 requires that agricultural produce be initially measured based on fair value at the point of harvesting. This then forms the ‘cost’ for the purposes of subsequently applying IAS 2 – Inventories.

 

Question :

Delta is a farming entity specialising in milk production. Cows are milked on a daily basis. Milk is kept in cold storage immediately after milking and sold to retail distributors on a weekly basis.

On 1 April 20X4, Delta had a herd of 500 cows which were all three years old.

During the year, some of the cows became sick and on 30 September 20X4 20 cows died. On 1 October 20X4, Delta purchased 20 replacement cows at the market for $210 each. These 20 cows were all one year old when they were purchased.

On 31 March 20X5, Delta had 1,000 litres of milk in cold storage which had not been sold to retail distributors. The market price of milk at 31 March 20X5 was $2 per litre. When selling the milk to distributors, Delta incurs selling costs of 10 cents per litre. These amounts did not change during March 20X5 and are not expected to change during April 20X5.

Information relating to fair value and costs to sell is given below:

Using the information in notes 1 and 2, explain, with appropriate computations, how Delta should report these transactions in the financial statements for the year ended 31 March 20X5.

Note: The mark allocations are indicated in each note above. Marks will be awarded for explanations as well as for computations.

 

Answer:

Under the principles of IAS 41 – Agriculture, the herd of cows will be regarded as a biological asset. Biological assets are measured at their fair value less costs to sell.

The carrying amount of the herd at 1 April 20X4 will be $130,000 (500 x {$270 – $10}).

When the 20 cows die, $5200 (20 x $260) will be credited to the herd asset and shown as an expense in the statement of profit or loss.

When the 20 cows are purchased for $4,200 (20 x $210), the herd asset will be debited with $4,000 (20 x {$210 – $10}).

The difference of $200 ($4,200 – $4,000) between the amount paid and the amount recognised as an asset will be shown as an expense in the statement of profit or loss.

The intermediate carrying amount of the herd before the year-end revaluation will be $128,800 ($130,000 – $5,200 + $4,000).

The carrying amount of the herd at 31 March 20X5 after revaluation will be $126,400 (480 x {$265 – $11} + 20 x {$235 – $11}).

The change in the carrying amount of the herd due to the year-end revaluation of $2,400 ($128,800 – $126,400) will be shown as an expense in the statement of profit or loss.

Therefore the total charge to profit or loss in respect of the herd for the year ended 31 March 20X5 will be $7,800 ($5,200 + $200 + $2,400).

The herd will be shown as a non-current asset in the statement of financial position and disclosed separately.

The milk held by Delta at the year end will be regarded as harvested produce.

Under the principles of IAS 41, harvested produce is recognised in inventory at an initial carrying amount of fair value less costs to sell at the point of harvesting.

In this case, the initially recognised amount will be $1,900 (1,000 x {$2 – $0·10}). This will be the ‘cost’ of the inventory which will henceforth be accounted for under IAS 2 – Inventories.

The inventory of milk will be shown as a current asset in the statement of financial position of Delta. The market price of milk is not expected to decline in the near future so there is no need for a write-down to net realisable value.

Examiners Feedback

Answers were satisfactory. The vast majority of candidates were able to appreciate that the dairy herd was a biological asset and the milk was harvested produce (which became inventory). Similarly the vast majority were able to appreciate that the carrying amount of the herd was based on fair value and so was the initial ‘cost’ of the milk inventory. However a significant minority of candidates didnot appreciate that the actual valuation method in both the above cases was ‘fair value less costs to sell’. Where this occurred, ‘own figure’ marking was applied to the other parts of the question. However additional marks were inevitably lost due to the failure of such candidates to appreciate the impact on the recognition of newly purchased cows (costs to sell debited to profit or loss on recognition). Other common errors included:

    • Careless mistakes regarding the selection of the appropriate ‘fair value’ of cows in the dairy herd at both 1 April 20X4 (should have been 500 at $270 {before deducting cost to sell}) and 31 March 20X5 (should have been 480 at $265 and 20 at $235 {before deducting cost to sell in both cases}).

    • Failure to identify the overall movement in the ‘fair value less costs to sell’ carrying amount of the dairy herd over the accounting period.

    • Incorrectly stating that the above change is recognised in other comprehensive income rather than profit or loss (or failing to identify where the change is recognised at all).

    Question :

    Omega has a herd of  300 cattle which are all six months old on 31 March 20X5 and a herd of  200 sheep which are all one year old at 31 March 20X5. The herd of  cattle will be sold when the  cattle are two years old. The herd of  sheep is expected to be sold within the next 12 months. There  are  two  markets  available  to  Omega  in  which  they  could  sell  the  cattle  and  the  sheep,   Market 1 and Market 2. Market 1 is the principal market in which cattle could be sold but Omega  sells  its  sheep  in  both  Market  1  and  Market  2  in  roughly  equal  proportions.  Therefore,  neither   Market 1 nor Market 2 can be identified as the principal market in which Omega could sell sheep.

    Relevant market prices and relevant costs of  sale at 31 March 20X5 are as follows: 

     

    Market 1

    Market 2

     

    Cattle $

    Sheep $

    Cattle $

    Sheep $

    Gross selling price per animal

    80

    61

    85

    63

    Transport costs per animal

    4

    3

    5

    4

    Selling costs per animal

    2

    2

    3

    4

     

    Answer: 

    Under the principles of IAS 41 – Agriculture – cattle and sheep are biological assets which are measured

    at fair value less costs to sell in the financial statements.

    Under the principles of IFRS 13 – Fair Value Measurement – the fair value of an asset is the price which would be received to sell the asset in an orderly transaction between market participants.

    Where more than one market exists for the asset, attempts should be made to identify the principal market for the asset. Where the principal market is identified, this market price should be used to establish fair value.

    In the case of Omega’s cattle, these should be measured with reference to market prices in Market 1. The fair value will be the market price in market 1 less the costs of transporting the cattle to market. The selling costs will be a further deduction to arrive at the IAS 41 value.

    Therefore the cattle of Omega will be measured at their fair value (300 x ($80 – $4) = $22,800) less costs to sell (300 x $2 = $600). The net measurement will be $22,200 ($22,800 – $600).

    Because the cattle will be used by Omega for more than 12 months, the cattle will be presented as a non-current biological asset in Delta’s consolidated statement of financial position at 31 March 20X5.

    Where it is not possible to identify a principal market for the sale of an asset, then the entity should use the most advantageous market as a means of identifying fair value.

    The most advantageous market is the one in which the expected net proceeds (after deducting selling costs) are the higher.

    In the case of Omega’s sheep, the expected net proceeds of sale of sheep in Market 1 are $56 ($61 – $3 – $2) and the expected net proceeds of sale in Market 2 are $55 ($63 – $4 – $4). Therefore Market 1 is the most advantageous market and should be used to measure the fair value of Omega’s sheep.

    Therefore the sheep of Omega will be measured at their fair value (200 x ($61 – $3) = $11,600) less costs to sell (200 x $2 = $400). The net measurement will be $11,200 ($11,600 – $400).

    Because the sheep will be sold by Omega within 12 months, the sheep will be presented as a current biological asset in both Omega and Delta’s statement of financial position at 31 March 20X5.

    Examiners Feedback

    The majority of candidates appreciated that the cattle and sheep herds were biological assets as defined in IAS 41 Agriculture. That said, a minority of candidates incorrectly stated that the herd of sheep would be recognised as inventory because this herd was expected to be disposed of within 12 months, thereby confusing biological assets with harvested produce. The majority of candidates were also aware that, in principle, biological assets are measured at fair value less costs to sell.

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